Friday, 4 August 2017

The lunatics have taken over the asylum.

From the BBC:

The governor of the Bank of England has said the banking sector could double in size but still needs tough regulation.

Mark Carney told the Guardian the financial sector could be worth 20 times the UK's economic output in 25 years.

He said: "If the UK financial system thrives in a post-Brexit world... it will be 15 to 20 times GDP in another quarter of century. Well then you really have to hold your nerve and keep the focus."


What he is talking about is gross assets, not net assets. In other words, if you add up the 'loans' made by all individual banks in the UK, it adds up to something like £7 trillion (five times GDP). This is wildly exaggerated as two-thirds of that is inter-bank stuff and made-up figures.

So if all UK banks were to merge into one large bank, the gross lending to the non-financial sector is about £2 trillion (a tad more than one times GDP). If you then deduct all bank liabilities (mainly deposits but also bonds), the true net worth is pretty much close to zero (balancing figure between two large unknowns).

Nonetheless, doubling the gross lending and borrowing is a superbly shit idea.

He said: "We have a financial system that is [now] ten times the size of this economy… It brings many strengths, it brings a million jobs, it pays 11% of tax revenue, it is the biggest export industry by some token... all good things.

The million jobs is a made-up number. There is a minority with truly essential/irreducible jobs (staff at the bank counter, people who fill up cash machines and people who keep the software working, a few loan officers to check the bona fides of borrowers) and the rest are completely superfluous.

The "11% of tax revenue" is another made-up number. Most of what banks collect is just rent from the productive economy, they are not adding anything much to it. If they were to collect less rent, the amount of tax they pay goes down but people would have more money to spend on other stuff which would generate the same amount of tax. We might as well levy income tax on burglars and say that they pay 1% of tax revenue.

We could go further and deduct the value of the government guarantee for banks, which has been calculated as being approx. equal to the total amount of tax that banks pay.

9 comments:

Dinero said...

Yep counting both loans , where one loan is financed from another loan is double counting. It can be considered the inner workings of the banking business, like adding up the finished product of a car factory plus the internal payment to the steel procurement department and calling that sum the economic product.

Ralph Musgrave said...

"Governor of the Bank of England". Shouldn't that read "Goldman Sachs's spy at the Bank of England"?

Lola said...

"...the gross lending to the non-financial sector is about £2 trillion (a tad more than one times GDP). If you then deduct all bank liabilities (mainly deposits but also bonds), the true net worth is pretty much close to zero (balancing figure between two large unknowns)..

Correct.

Bank's profit on the turn between what they can borrow for and then lend at (let's ignore all the loans they create from nothing...)

So how can it be any other way?

Dr Evil said...

So why is he not being challenged on this statement?

paulc156 said...

Banks profits are pretty much in line with the value of the 'too big to fail' subsidy they get each and every year...according to Andrew Haldane, chief economist now, of the Bank of England.

http://www.bis.org/review/r100406d.pdf

Mike W said...

'Mark Carney told the Guardian the financial sector could be worth 20 times the UK's economic output in 25 years.'

I read that the other night just after I had finished my 'spag bol' tea. Do I bill Carney for the vomit it induced over my work trousers? Will billing Carney for the vomit over my shoes too, be considered double counting? (Obviously it was the same stream of vomit!)

Graeme said...

Don't forget that some people, eg EU and Corbyn want a financial transactions tax. Who do they think will pay for it? Haven't they grasped that incidence doesnt always mean the person who "writes the cheque"?

Bayard said...

Graeme, why worry about incidence when you have a dog-whistle?

Mark Wadsworth said...

Din, RM, L, yes and agreed.

DrE, all Carney does is spout transparent nonsense. It's an Emperor's New Clothes thing, nobody dates question it because it underpins Home-Owner-Ism and rent seeking by that vast confidence trick known as the "financial sector".

PC, I had seen that calculation, and the upper limit of estimates is pretty much the same as total annual profits. But even the lower limit is equal to the total amount of tax (corp tax, PAYE, irrecoverable VAT and stamp duty etc) paid by the financial sector.

Mike, send him a bill, see what happens.

G, the FTT is a terrible idea. I met the bloke who first started pushing it ten years ago and explained why it is a bad idea and a bank asset tax is a much better idea (having been tried and tested) and he sort of agreed, but the idea has taken on a life of its own.

McDonnell said recently the point was to reduce the size of the banking sector, which might be a worth aim but is completely missing the point.

B, the incidence of an FTT would indeed be on that small part of the financial sector (hedge funds and high frequency traders) who engage in zillions of transactions a year. But they will soon find a way round it (i.e. by booking stuff abroad).